On the last day of last year, Sebi chief M Damodaran announced that the market regulator had a new year’s gift for mutual fund investors. In a major change that was first proposed in August, Sebi has abolished load on mutual fund investments made directly from fund companies, either through their offices and service centres, or online. The logic behind this move is simple. ‘Load’ is the commission that the fund company takes out of the investors’ money and pays to the distributor who sold the fund. Conceptually, this is a fee paid by the investor in exchange of the investment advice and the service (helping fill the form, depositing it, etc).
In reality, it is a retailer’s profit as in selling any other product. Until now, if an investor walked into a fund’s office and made an investment, then the fund company pocketed the amount. Industry sources tell me that around 5% or so of investments are made directly in this manner.
Now, all Sebi has said that if there’s no distributor in the picture then the fund company must not take from the investor the amount meant for the distributor. In my view, this is straightforward, fair and logical, and Damodaran is entirely justified in saying that this is a major pro-investor reform that the regulator has implemented. After all, the load is generally 2.25% and that’s a lot of money to be paid as a commission for an investment product.
However, for obvious reason, mutual fund distributors are a worried lot, and that worry is justified. If you are selling a product for a certain amount and the very same thing is available elsewhere for cheaper, then as a businessman you know that you are in trouble.
Fund distributors think that from now on, whenever they convince an investor to invest, he’ll go and make the investment directly at the fund companies’ office because he stands to gain 2.25%. This is a valid fear.
Even if such behaviour is rare to begin with, eventually the news could spread and more and more investors could start doing this. What is the solution? In my opinion, distributors who are actually delivering good quality advice and service should see this as an opportunity.
It is a fact that to a large extent, mutual funds are sold and not bought. There’s a tremendous opportunity for the better distributors to differentiate themselves from others and actually use this change in rules to actually grow their business.
However, it is a fact that the current regulations are unfair to fund distributors. What we have is a situation where the regulations force fund companies to charge a lower price and force the distributors to charge a higher price for the same product. The law says that it is illegal for a distributor to give a discount by returning a part of his commission to investors. This is absurd, and amounts to an administered price.
Distributors are supposed to provide advice, consulting and service to investors. Different investors need different levels of these services and should logically pay different fees depending on the nature of services. I think this market can be healthy and open only if the law fixes a maximum load and a distributor is free to charge any level less than that.
Unless that is done, we will continue to be in a situation where distributors are forced to give discounts under the table and then arm-twist fund companies to recompense them in other ways, which is the on-the-ground reality today.
?The author is CEO, Value Research
